Innovation Investment Fund Program Round Three Direction No. 1 of 2007

The direction defines several terms that drive how the program works in practice. “Commonwealth program capital” means amounts invested by the Commonwealth in a licensed fund. “Privately sourced capital” is a residual concept: amounts invested that are not, in the Program Delegate’s opinion, “Government sourced capital” (clause 4 definitions). “Government sourced capital” is broadly defined to include amounts from any person funded directly or indirectly by the Commonwealth, and extends to persons whose funding source the Program Delegate considers is indirectly Commonwealth funded, subject to an opinion based exclusion. This definition gives the Program Delegate wide discretion to reclassify capital sources, which directly affects the required matching ratio. A fund seeking to maximise Commonwealth capital must ensure its private investors are not treated as government sourced, otherwise the 1:1 ratio could be breached.

“Early stage companies” are defined by reference to the IIF Round Three guidelines as seed, start up, and early expansion stages. The direction itself does not specify those stages, so a reader must consult the separately published guidelines. “Innovation” is defined broadly as the process whereby ideas are transformed through economic activity into sustainable, value creating outcomes, including new products, processes, and services. This is aspirational language, not a legally operative test for investee eligibility.

“New manager” is a distinctive concept: a management team that has not previously raised a venture capital fund in Australia, and must include either experienced venture capital personnel or personnel with other relevant contemporary management experience (clause 4 definition). This reflects the policy objective of developing new fund managers, but the definition is vague on what “other relevant and contemporary management experience” means, leaving it to the Board to determine.

“Key personnel” are those individuals the Program Delegate determines to be key based on technical and managerial expertise, time commitment, and day to day involvement. Additions or replacements require approval from both the Program Delegate and the Supervisory Board. This gives the Program Delegate ongoing control over the fund manager’s human capital.

“Equity” includes any form of debt financing approved by the Program Delegate that does not compel payment of interest before the end of the term except in default. This allows quasi equity structures (convertible notes, redeemable preference shares) but only if the Program Delegate approves them. It is not an open ended definition.

The merit criteria in clause 9 include whether the applicant has effective strategies for training Australian based staff in early stage venture capital investing; the proposed fund size and capital ratio; the level and structure of management fees; the applicant’s capacity and experience in early stage equity investing, particularly realising returns and sourcing opportunities; a balanced management team; understanding of Australian and international markets; and demonstrated willingness to operate within the intent of the IIF program. These criteria are not exhaustive - the Board may also have regard to additional criteria and undertake other enquiries (clause 13).

This direction directly affects several categories of persons and entities. The primary targets are applicant fund managers seeking a licence under IIF Round Three. They include both established venture capital firms and new managers as defined. Because the program is limited to early stage investing in Australia, fund managers who specialise in later stage or offshore investments are unlikely to qualify. The direction does not specify a maximum number of licences, but the $20 million per fund cap and the 1:1 ratio constrain the total Commonwealth exposure.

Licensed funds once established are affected by ongoing governance requirements. Their governing documents must comply with the licence and the direction. The manager must establish and maintain a Supervisory Board (clause 17), which has decision making powers over matters set out in the governing documents. That Supervisory Board’s decisions are binding on the manager unless the Program Delegate exercises override power. This affects the fund’s operational autonomy.

Investors in licensed funds are affected by the capital classification rules. A private investor who is itself government funded (for example, a university or a state government owned corporation) may have its contribution treated as Government sourced capital, reducing the amount of Commonwealth program capital the fund can access. The Program Delegate’s opinion on this is discretionary and not subject to a merits review mechanism set out in the direction. This creates uncertainty for potential investors and may discourage some institutional investors that have any form of government connection.

Early stage companies seeking venture capital from IIF funds are indirectly affected. The funds must invest only in eligible companies (those meeting the early stage and R&D definitions). The direction does not prescribe investee eligibility criteria in detail; it refers to guidelines (clause 16(g) lists “investee company eligibility” as a matter on which the Program Delegate will seek Board advice). That means investee companies cannot rely on a clear statutory test and must wait for the guidelines.

The Board itself is affected because it gains administrative responsibility for the program (clause 19) but subject to restrictions in section 19A of the Industry Research and Development Act and to the Program Delegate’s ultimate decision making authority. The Board’s role is advisory and merit ranking, not final licensing.

Employees of fund managers are affected indirectly through the requirement to train Australian based staff (merit criterion (a)). This imposes a compliance and reporting burden on fund managers to demonstrate their training strategies. It may also create opportunities for junior staff to gain venture capital experience, which aligns with the policy objective of developing local expertise.

The Department of Industry, Tourism and Resources (now likely the Department of Industry, Science and Resources) is affected because the Program Delegate is an employee of that department. The direction gives the Program Delegate significant powers to make policies, guidelines, and decisions, and to control variations to governing documents, sanctions, and licence termination. This centralises substantial administrative discretion in a single departmental officer.

The direction imposes duties primarily on the Board, but also allocates rights and powers to the Program Delegate, applicants, and licensed funds.

Board’s duties. The Board must have regard to the policy objectives in clause 5 when giving effect to the direction. That clause lists four objectives: developing fund managers, encouraging commercialisation of R&D, establishing a revolving scheme, and developing a self sustaining venture capital market. The word “must” suggests a mandatory consideration, but the objectives are broad and could be interpreted to justify almost any decision. The Board must assess each eligible application on its merit according to the criteria in clause 9 (subject to clause 7 allowing refusal to rank). It must provide a technical merit ranking to the Program Delegate. It must consider applications as soon as practicable and may interview applicants (clause 6). The Board also has a duty to provide advice when the Program Delegate seeks it on matters listed in clause 16, including new investments beyond five years, changes to key personnel, sanctions, suspension, termination, and investee eligibility. The Board has administrative responsibility for the program (clause 19), but that responsibility is subject to restrictions in section 19A of the Act.

Board’s rights and discretions. The Board may in its absolute discretion attribute a preference to new managers (clause 10). It may attribute a higher level of relative importance to one or more merit criteria (clause 11). It may have regard to program accessibility for industry around Australia (clause 12). It may have regard to additional criteria and undertake other enquiries (clause 13). It may decide to refuse to provide a merit ranking if not satisfied with the level of merit (clause 7). These discretions give the Board considerable flexibility, but also introduce unpredictability for applicants.

Program Delegate’s powers. The Program Delegate may make policies of general application on program administration, after seeking Board advice (clause 14). The Delegate may make decisions and guidelines, again after seeking Board advice (clause 15). The Delegate seeks Board advice on the specific matters in clause 16 but is not required to follow it - the clause says “seek the advice”, not “act on the advice”. On matters within the Delegate’s licence responsibility, the Delegate’s decision overrides the Supervisory Board’s decision (clause 17). The Delegate also has power to determine eligibility of applications, approve debt financing as equity, classify capital as government sourced or not, and approve changes to key personnel.

Applicants’ rights. An applicant has the right to lodge an eligible application in the form required by the Program Delegate. If the application is determined eligible, the applicant is entitled to a merit assessment by the Board (subject to clause 7 refusal). The applicant may be interviewed (clause 6(c)). However, there is no right to a licence or even to a merit ranking if the Board is not satisfied. The applicant may be required to provide additional information (clause 6(d)). The direction does not give applicants a right to reasons for a refusal or a right to internal or external review.

Licensed funds’ duties. Once licensed, the fund must comply with its governing documents, which include the licence, constitution, and agreements with investors and manager. The manager must establish and maintain a Supervisory Board (clause 17). The fund must also comply with any policies, decisions, and guidelines made by the Program Delegate.

Rights of investors and Supervisory Board. Investors in a licensed fund have rights under the governing documents. The Supervisory Board has power to make decisions on matters set out in those documents, and those decisions are binding on the manager unless overridden by the Program Delegate on matters within the Delegate’s licence responsibility.

The direction itself does not create civil penalties or criminal offences. It operates within the framework of the Industry Research and Development Act 1986, which may contain its own offence provisions for non compliance with directions. However, the direction explicitly contemplates several enforcement mechanisms through the licensing agreement and governing documents.

Clause 16 lists matters on which the Program Delegate will seek Board advice, including “the application of sanctions against a manager or investor” (paragraph (d)), “the suspension of funding in relation to a licensed fund” (paragraph (e)), and “the termination of a licence” (paragraph (f)). These are the primary enforcement tools. The direction does not specify what the sanctions are or what triggers them; those details are left to the licence and governing documents. A fund manager that breaches the licence or the direction’s requirements (for example, by investing in ineligible companies or exceeding the capital ratio) risks suspension of Commonwealth funding, application of financial or non financial sanctions, or termination of the licence.

The Supervisory Board also has a role in enforcement. Its decisions are binding on the manager (clause 17). If the manager fails to comply with a Supervisory Board decision, the Program Delegate could treat that as a breach and escalate to sanctions or termination. The direction does not give the Supervisory Board independent power to impose penalties, but it can withhold approval for certain actions, effectively blocking non compliant conduct.

There is no express right for the Commonwealth to recover amounts already invested if the licence is terminated. That would depend on the specific terms of the licence agreement, which is not reproduced in the direction. Similarly, there is no mention of interest penalties, liquidated damages, or personal liability for directors of the fund manager.

The Program Delegate’s broad discretionary powers carry a risk of arbitrary or inconsistent enforcement. The direction does not require the Delegate to give reasons for a sanction, suspension, or termination decision, nor does it provide a right of review to the Board or an external tribunal. An aggrieved manager or investor could potentially seek judicial review under the Administrative Decisions (Judicial Review) Act 1977 (Cth), but that would be on procedural fairness or jurisdictional error grounds, not on the merits.

Because the Commonwealth is a party to the licence, breach could also give rise to contractual remedies under the licence agreement, but the direction does not elaborate on those.

This direction is made under the Industry Research and Development Act 1986 (Cth), and its operation is expressly subject to the restrictions in section 19A of that Act regarding the functions that may be conferred on the Board (clause 19). The direction does not itself create new statutory obligations; it directs the Board on how to perform its functions. Therefore, the Act remains the primary source of legal authority for the Board’s existence and powers.

The IIF program also operates through contractual arrangements: the licence agreement between the Commonwealth and the fund manager, and the governing documents among the fund, its manager, and investors. The direction contemplates that these documents will contain detailed obligations, and the direction’s provisions on sanctions, suspension, and termination will be enforced through those contracts rather than directly through the direction.

The definition of “R&D activities” in clause 4 incorporates concepts of systematic investigation, innovation, technology transfer, technical risk, and new knowledge. This may interact with the R&D tax incentive provisions in the Income Tax Assessment Act 1997 and the Tax Laws Amendment (Research and Development) Act 2011, but the direction does not refer to those laws. A company receiving IIF investment may also claim R&D tax offsets, potentially generating interactions between program eligibility and tax treatment.

The direction’s “equity” definition includes debt financing approved by the Program Delegate that does not require mandatory interest payments before maturity. This interacts with the Corporations Act 2001 (Cth) regarding fundraising, disclosure, and managed investment schemes. A fund structured as a unit trust or a company may need to comply with Chapter 5C or Chapter 7 of the Corporations Act. The direction does not exempt funds from those requirements.

The “Government sourced capital” definition potentially interacts with state and territory funding programs. If a state government agency invests in an IIF fund, the Program Delegate may classify that as government sourced capital, reducing the Commonwealth contribution. This could discourage co investment between Commonwealth and state programs.

The direction does not mention privacy laws, anti money laundering laws, or foreign investment review, but those laws would apply to fund managers and investee companies in the ordinary course. The direction’s requirement for training Australian based staff and preference for new managers may also intersect with immigration laws if the fund manager seeks to bring in skilled personnel from overseas.

The instrument is titled “Innovation Investment Fund Program Round Three Direction No. 1 of 2007”. It was given by the Minister for Industry, Tourism and Resources on 3 October 2007 and commenced on the day particulars were published in the Gazette and registered in the Federal Register of Legislative Instruments. It applies to application processes held after 2006. The direction itself does not record any amendments, nor does it state whether it supersedes any earlier directions for Round Three. There is no mention of subsequent directions. Given the year of making (2007), the IIF Round Three would have been a limited term program. It is likely that the direction was either superseded by later directions for later rounds (if any) or simply ceased to be operative once Round Three licences were issued and the program wound down. The Federal Register of Legislative Instruments (now the Federal Register of Legislation) would show if any amending instruments were made, but the text provided does not include them. For the purposes of this deep dive, we treat the direction as a standalone instrument with no recorded amendments within the source material. If amendments exist, a practitioner would need to check the register.

The direction does not cite any litigation, and no cases are mentioned in the text. There is no publicly known high profile litigation specifically concerning this direction. However, the discretionary nature of the Program Delegate’s powers and the lack of a statutory right of merits review make judicial review a plausible avenue for an aggrieved applicant or licensee. Possible grounds for challenge include failure to take into account a relevant consideration (such as the policy objectives in clause 5), taking into account an irrelevant consideration, acting for an improper purpose, or unreasonableness in the Wednesbury sense (under Australian administrative law). A hypothetical challenge could arise if the Board refused to rank an application based on a criterion not listed in clause 9 or if the Program Delegate classified capital as government sourced without giving the applicant an opportunity to be heard. The direction does not contain a privative clause ousting review. Practitioners advising IIF applicants should be aware of the possibility of judicial review under the Administrative Decisions (Judicial Review) Act or the Judiciary Act 1903 (Cth), but no authoritative precedents are reported for this specific direction.

Several features of this direction create traps for unwary applicants, licensees, and investors.

The Program Delegate has nearly unchecked discretion. The definition of “Government sourced capital” depends on the Program Delegate’s opinion, with no criteria for exercising that opinion. The Program Delegate also determines eligibility of applications, key personnel, and whether debt financing qualifies as equity. The direction says the Delegate “will seek” Board advice on certain matters (clause 16), but does not say the Delegate must follow it. The Delegate also makes policies and guidelines of general application (clauses 14 and 15). Applicants cannot predict how these discretions will be exercised and have no right to reasons or merits review.

The “new manager” preference is not a guarantee. Clause 10 says the Board may in its absolute discretion attribute a preference to new managers. That means a new manager application could be ranked lower than an experienced manager if the Board chooses not to exercise the preference. The Board may also attribute higher importance to other merit criteria (clause 11). The direction is silent on how the preference interacts with the other criteria.

The capital ratio is not a simple 1:1. The cap is that Commonwealth program capital must not exceed a 1:1 ratio to privately sourced capital, and Commonwealth capital is capped at $20 million (clause 9(b)). But “privately sourced capital” excludes Government sourced capital, as determined by the Program Delegate. An investor that is a university, a state government entity, or a company that receives government grants could be treated as government sourced. This could reduce the pool of acceptable private capital, forcing the fund to either accept less Commonwealth capital or find investors with no government connection. The Program Delegate may also treat as government sourced any person “indirectly in receipt of funding” from a source that is itself government funded. This could capture superannuation funds that invest in government bonds, or charities that receive government grants.

The Supervisory Board is not independent of the Program Delegate. While the Supervisory Board makes decisions binding on the manager, the Program Delegate can override those decisions on matters within his or her licence responsibility (clause 17). The direction does not define which matters are within the Delegate’s responsibility; that is left to the licence. This creates uncertainty about the division of power. A fund manager could be caught between competing instructions from the Supervisory Board and the Program Delegate.

The merit criteria include “willingness to operate within the intent of the IIF program” (clause 9(g)). This is a subjective criterion that invites the Board to assess an applicant’s attitude, not just its capabilities. An applicant with a technically strong proposal but a history of disputing regulator decisions could be marked down on this criterion.

The direction does not specify a timeframe. Clause 6 says the Board must consider applications “as soon as practicable”, but no maximum period is imposed. This could lead to delays in the licensing process, particularly if the Board or Program Delegate requests additional information.

Equity includes approved debt, but approval is discretionary. If a fund wants to use convertible notes or other debt like instruments, it must obtain prior approval from the Program Delegate. There is no guarantee of approval, and the direction does not set criteria for when approval will be given.

The object clause is not legally binding. The requirement in clause 5 that the Board “must have regard to” the policy objectives imposes a duty of consideration, but the objectives are so broad that they can accommodate almost any decision. A court would be reluctant to find a breach based on an alleged failure to achieve the revolving fund objective.

Compliance with this direction is only directly required for the Board and, indirectly, for applicants, licensees, and the Program Delegate. For a fund manager seeking a licence, the compliance path involves several steps.

First, an applicant must ensure its application meets the eligibility requirements set by the Program Delegate. The application must be in the form required and must be determined eligible. Practitioners should liaise early with the Department to confirm that the form and content are acceptable.

Second, the applicant should prepare its proposal to address each of the merit criteria in clause 9 thoroughly. This includes documenting strategies for training Australian staff in venture capital investing; setting a fund size and capital structure that complies with the 1:1 ratio and $20 million cap; proposing a level and structure of management fees that is competitive; demonstrating capacity and experience in early stage equity investing, especially in realising returns and sourcing deals; showing a balanced management team with relevant qualifications and skills; demonstrating understanding of Australian and international markets; and providing evidence of willingness to operate within the program’s intent. For new managers, the applicant should emphasise any relevant management experience of team members, even if not in venture capital.

Third, applicants should be prepared to be interviewed by the Board (clause 6(c)) and to provide additional information on request (clause 6(d)). The direction gives no right to a hearing, so applicants should put their best case in writing.

Fourth, once licensed, the fund manager must comply with the governing documents and with any policies, decisions, or guidelines made by the Program Delegate. The manager must establish and maintain a Supervisory Board (clause 17) and comply with its decisions unless the Program Delegate overrides them. The manager should ensure that the governing documents clearly define the Supervisory Board’s powers and the scope of the Program Delegate’s responsibility.

Fifth, the fund manager must manage its capital sourcing carefully to ensure that all capital counted as privately sourced is not reclassified as government sourced. This means scrutinising each investor’s sources of funds and, where there is any government connection, seeking a determination from the Program Delegate before accepting the investment. The direction does not require the Program Delegate to provide a binding ruling, but early engagement is prudent.

Sixth, any proposed change to key personnel, fund structure, or investment beyond the fifth anniversary requires the Program Delegate to seek Board advice (clause 16). The manager should not implement such changes without prior approval. Similarly, any variation to the governing documents requires the Program Delegate to seek Board advice (clause 18).

Seventh, the fund must adhere to investee company eligibility requirements as determined by the guidelines and the Program Delegate. Each investment should be documented to show how the investee qualifies as an early stage company commercialising R&D as defined.

Finally, fund managers should maintain records of compliance with all requirements, including training activities, board decisions, and correspondence with the Program Delegate. The Board may collect and analyse data on program performance (clause 21), and the fund manager should be prepared to cooperate with independent evaluations.

The direction is a legislative instrument, not a contract. Non compliance may lead to sanctions, suspension, or termination of the licence, as well as potential judicial review proceedings. Legal advice should be sought on the specific terms of the licence and governing documents, which will contain additional compliance obligations not covered in this direction.